1. Field of the Invention
The present invention relates generally to organizational and business operations and, more particularly, to a system and method for analyzing an operation of an organization, especially in the context of an outsourcing.
2. Background of the Invention
Outsourcing is the delegation of significant business functions to a supplier (or outsourcer). Over the last 15 years, businesses around the world have made outsourcing of information technology functions a standard corporate strategy. Within the past few years, these businesses have also placed increasing emphasis on the outsourcing of indispensable business functions such as human resources, finance and administration, and procurement.
The standard outsourcing paradigm is as follows: “The outsourcer will perform the same services the client previously performed, at the same or a higher level of delivery, for the same or a lower price.” Significant is the historical nature of this promise. To fulfill this commitment, outsourcers/suppliers need to understand what the client was previously doing, at what level of performance, and at what cost. While these may seem like appropriate inquiries, experience has shown that obtaining the necessary facts is time consuming, expensive, and subject to potentially divisive negotiations. (As used herein, “client” and “customer” refer to the organization that is outsourcing an operation, which is typically referred to as the customer or client of the supplier/outsourcer and the client or customer of an outsourcing consultant.)
The concept of outsourcing provides clients a business proposition that is hard to ignore. Put simply, the outsourcing industry offers to take over a client's operations (or portions of such operations) and to perform at the same or a higher level of delivery for the same or a lower price. This business case is highly compelling not only for senior executives, but also among the managers in charge of operations currently in vogue to be outsourced (i.e., support organizations such as information technology, human resources, and accounting, as well as line operations such as insurance claims administration, mortgage processing, and retail bank call centers).
Outsourcing provides the reengineering of a business operation with a guarantee on performance. The client determines what functions it would like a qualified supplier to perform and contracts for the provision of those services for a price. As the price or pricing mechanisms are pre-established, the client can focus on the remainder of its operations and leave the change of the outsourced component to the chosen supplier. The client can therefore better meet the challenges of today's competitive and fluctuating markets, which force companies to rapidly acquire the capabilities necessary to deliver best-in-class, risk-mitigated change on-time and on-budget.
With commercial-grade outsourcing now in the middle of its second decade of existence, both early adopters and first-timers expect more out of their outsourcing relationships than a supplier that will maintain the status quo for the contractual term at a reduced cost (assuming costs could be forecasted accurately in the first instance). To appreciate why it has taken this long to come to this seemingly simple conclusion, it is important to understand that, while the theory behind outsourcing is for the customer to specify its desired outputs and to allow the supplier the latitude to produce such outputs as it deems best, it has been with rare exception the theory has been put into practice.
There are many explanations for this, but the most compelling is that leading edge adopters learn to survive by adequately mitigating the risks inherent in change. As one of the largest risks in the earliest outsourcings (generally data processing centers and other information technology based infrastructure responsibilities in the late 1980s and early 1990s) was the supplier's ability to perform adequately, it made sense for the work to be meted out in a highly controlled fashion.
Accordingly, rather than the outsourcing agreements simply describing the supplier's solution to achieve the customer's objectives, a detailed description of the relevant portion of the customer's operation was provided as the basis for the schedule of work. These schedules were highly negotiated. Suppliers did not want to take on more responsibility (read “risk”) than their customers otherwise did with their own operations, and customers did not want to be charged additional amounts for services that were being performed by their operations, but somehow did not get written up in the schedule of services.
As each new customer of outsourcing was just as interested in mitigating outsourcing risks as its earliest adopters, the words and the mechanisms supporting the process of outsourcing became de rigueur and, by the mid-1990s, was beginning to look like a commodity. For information technology outsourcing (“ITO”), this produced a set of established services for performing the various components of information technology. These ITO components, or “towers” as they are often referred to, appeared to produce the ability to benchmark the services, which ushered in the inevitable commoditization of the services and focus on price as the primary distinguishing feature between the suppliers' offerings. Over time, this led the outsourcing industry to the conclusion that if the towers were commodities, then by selecting the best supplier for each tower (known as “best-of-breed” sourcing) a customer could develop the best possible delivery engine at the lowest cost.
This tower-oriented, best-of-breed approach to sourcing fails on two important objectives: (1) creating value from their outsourcing arrangements rather than just reducing costs; and (2) shifting from relationships characterized by limited responsibility and accountability to more broadly defined and predictable relationships with their outsourcing suppliers.
Thus, the conventional methods for completing an outsourcing transaction do not achieve these above two objectives for several key reasons, including the schedule of work, the customer objectives, the towers of service, the best-of-breed sourcing, and the governance.
Schedule of Work. These schedules are developed based on what the customer does today. The underlying idea is that if the customer was doing it before, then the supplier should do it tomorrow. These schedules, however, do not accommodate customers who want more or better than what they have today.
By basing the schedule of work on what the customer does today, the customer will still have to articulate what it does today (which is not an insignificant task to perform accurately) and since nothing has otherwise changed, the customer and supplier will still feel compelled to negotiate the wording. Further, the customer will also have to describe, in written form, what else it wants (i.e., the “more” or “better” parts) which will lead to more negotiation.
What is needed is a tool that both customers and suppliers can use to describe the functions to be transferred back and forth.
Customer Objectives. One of the chief complaints heard from outsourcing customers is that their suppliers do not, without additional revenue incentive, voluntarily make meaningful changes to the environment during the term of the agreement. There are two primary reasons for suppliers taking this approach: (1) the practice of defining the schedule of work based on a snapshot of what the customer's operation was previously doing, unless the proposed work specifically includes a well-developed set of change activities; and (2) neither specifying the customer's objectives during the development of the transaction nor developing the basis for future change.
What is needed is a system and method that enables suppliers to add value to a client's business process during the term of the agreement.
Towers of Service. Developed initially for supplier pricing purposes, towers, as the term applies across the spectrum of ITO and Business Process Outsourcing (“BPO”), are generally groupings of either various technologies or other things on which processes are performed. While this has worked well for developing pricing constructs, it has institutionalized within the outsourcing community the belief that the towers are somehow walled-off from one another and therefore safe to source without repercussion.
Unfortunately, this thinking has been a primary contributor to service delivery failure and ultimately customer dissatisfaction. The tower-based mindset results in the foundation activity (i.e., the development of the sourcing strategy) focusing rather simplistically on which tower(s) should be outsourced, rather than taking a hard look at the full spectrum of base processes and analyzing the operation in question to determine the right sourcing disposition to achieve the customer's objectives. Similarly, by cleaving an operation into pieces by outsourcing towers, the processes that span the various towers (of which there are many) are broken and require the customer, as general contractor, to provide the glue to integrate the now separated processes into a single coherent function.
However, even more damaging is the value that is destroyed by this fixation on towers (or, “silos” as others would describe it). Businesses have worked hard to tear down their silos and reap their just rewards. Automobile manufacturers have learned how to pull the development of new cars across their organizational structures to cut by over half the seven or more years it otherwise took to traverse the silos of, for example, marketing, design, engineering, manufacturing, and sales. Financial institutions have learned that brand loyalty is hard to achieve when they force their customers into procuring and managing their services separately such as for retail banking, mortgage banking, and investment banking. What these and other operations have found is that while they may be organized vertically like their organization charts show, the work processes move horizontally across the operation. The key to value creation is through a process-oriented approach, not a tower-based segmentation.
What is needed is a mechanism from which all of the key sourcing decisions across the various stages (i.e., strategy, transaction, and operation) can be made.
Best-of-Breed Sourcing. For varying reasons, customers, their advisors, and even some suppliers like the concept of best-of-breed sourcing. Customers like it because the notion of assembling the best suppliers is thought to produce the best results. Advisors like it because it produces more transactions on which their services can be utilized. In addition, certain suppliers like it because it gives them more opportunities to get their foot in the customer's door.
Unfortunately, from the customer's perspective, the benefits of the concept are rarely achieved. Indeed, a simple assemblage of the best parts does not necessarily make the best result. Imagine the headaches of assembling a car from the perceived best parts from among all of the manufacturers, or building a home from blueprint elements of other houses. What the sum total lacks in each case is the interoperability of the parts and, by default, the customer inherits the problem of making the creation work—generally, the complete opposite of what it had in mind when assembling the collection in the first place.
Customers also find they do not have the stamina to produce the desired number of outsourcing transactions. Outsourcing transactions are notoriously exhausting for an operation and most customers give up on their search for supplier perfection long before reaching their goal.
What is needed is a mechanism to help the customer and its suppliers understand the complexity a planned outsourcing transaction will have on the totality of the operation.
Governance. As outsourcing has grown in popularity, so too have the issues customers and suppliers have in trying to develop symbiotic relationships. To date, the cure for such ails has been to increase the level of governance—for example, more executives, more committees, more meetings, more reports, faster escalation procedures, and streamlined dispute resolution processes. Unfortunately, the types of problems producing the most friction between customer and supplier are not appropriately solved using the corporate governance technique of developing guiding principles.
Consider the example of a supplier with the responsibility to develop, for an ITO customer, an annual infrastructure architecture plan. While the customer might be highly interested in the format and level of detail to be contained in the supplier's architectural document and the supplier might be highly interested in what information the customer is going to make available from which a revised architecture can be developed, current approaches for addressing this issue often do not deal with this level of detail. Rather, the supplier may simply be directed to produce a draft procedure for the interaction as much as twelve months after the outsourcing agreement becomes effective. Without meaningful customer guidance about what to include in the procedure, the resulting draft is often rejected by the customer as useless.
What is needed is a mechanism to allow both customer and supplier to understand the interactions of high importance, as such interactions can either create or destroy value.